‘Cash in hand’ payments to workers no longer tax deductible, ATO says
The ATO has issued a reminder to accountants that ‘cash in hand’ payments made to workers from 1 July 2019 will no longer be tax deductible.
This new measure will take effect for payments made to workers from 1 July 2019 for income tax returns lodged for the 2020 income year onwards and is part of the government’s response to recommendations from the Black Economy Taskforce, the Australian Taxation Office (ATO) said.
‘Cash in hand’ refers to cash payments to employees that do not comply with pay as you go (PAYG) withholding obligations, the ATO clarified.
Payments made to contractors where the contractor does not provide an ABN, and the business does not withhold any tax, will also not be tax deductible from 1 July, the ATO said.
Assistant commissioner Peter Holt explained that the new rules have a dual purpose of levelling the playing field for honest businesses that are doing the right thing by their workers as well as tackling the black economy.
“It’s fairly straight-forward: do the right thing and you can claim a deduction. Deliberately do the wrong thing and you’ll miss out on a deduction and risk being penalised,” Mr Holt said.
The Black Economy Taskforce estimates that the black economy is costing the community as much as $50 billion, which is approximately 3 per cent of gross domestic product (GDP).
“Businesses that operate in the black economy are undercutting competitors and gaining a competitive advantage by not competing on an even footing,” Mr Holt noted.
In addition to the loss of a tax deduction, employers caught not complying with their PAYG withholding obligations may be penalised for failing to withhold and report amounts under the PAYG withholding system.
“This new measure is just one of the many ways we’re tackling the black economy,” Mr Holt said, adding that when cash is used to deliberately hide income to avoid paying the correct amount of tax or superannuation it’s illegal.
Employers who mistakenly classify their employee as a contractor will not lose their deduction where their worker provides them with an ABN.
Mr Holt said that payers who attempt to do the right thing but make a mistake do not need to worry; they will not lose their deduction.
“Our objective is to support small business to help them get it right. But anyone caught deliberately doing the wrong thing will lose their deduction,” he said.